Can I gift my home to my children and continue to live there?

At the same time, younger generations are finding it increasingly difficult to get onto the property ladder without support from the bank of mum and dad.

HMRC collected £5.2 billion in Inheritance Tax in the last tax year. With headlines and statistics like this, understandably, legal advisors are often asked by clients how to make their estate as Inheritance Tax efficient as possible. A common question that is asked is ‘can I gift my home to my child or children and continue to live in it?’

This is an option which can help a child onto the property ladder, without any significant change in the parents’ lifestyle. However, this type of tax and succession planning only works in certain situations.

The 7 year rule

If you make a gift, provided you survive 7 years, it is considered outside of your estate for the calculation of inheritance tax. Reduced rates of inheritance tax, known as taper relief, can be available in as little as 3 years.

However, Inheritance Tax legislation is complex and can be a minefield for the unwary.

Gifts with reservation of benefit

One of the potential complications of the 7 year rule is where you retain a benefit after you’ve made the gift; for example, if you gave your home to your children but continued to live there rent-free. In these circumstances HMRC would add the value of your home that you gave to your estate for the purposes of calculating the inheritance tax on your death. You’re therefore back to square one!

Unfortunately, for most people giving their property to a child or children whilst continuing to live there is impossible as they cannot afford to pay an open market rent and therefore, in HMRC’s opinion, continue to receive a benefit after making the gift.

So what are the other options?

Living with your children

There is an exception to not paying rent. Where you and your child or children live together, and you anticipate that you will continue to do so, it is possible to gift part of your home and not have to pay rent. The planning can be unravelled if you stop living together.

For example, a mother may decide to gift 50% of her home to her son who lives with her. If the mother survives 7 years, the gift of the 50% will be out of her estate for the calculation of inheritance tax. Depending on the value of the home, this may completely eliminate the inheritance tax on the property as the other half may pass under the available nil rate band allowances.

It’s important that no benefit is received. So in the above situation, the mother will need to continue to pay at least 50%, being her share, of the running costs for the property.

Depending on the value of the home and other assets it may be appropriate to give a larger share. However, this needs to be assessed on a case by case basis as it can be categorised  as ‘aggressive tax planning’ by HMRC.

As always, it’s imperative that legal advice is taken before considering any tax planning.